SAN ANTONIO -- In the coming weeks, a committee of business professionals, like skilled surgeons, will dissect the corporate body of a regional c-store behemoth. And in CST Brands, they will likely find an artery of success stories, a few blockages and a series of unknowns.
Three years since it was spun off from Valero Energy Corp.—the nation’s largest independent refiner—CST Brands is under a shroud of uncertainty. Late last week, CST, which has more than 1,900 convenience stores in the United States and Canada, brokered a deal with two activist shareholder groups that will affect the composition of its board of directors.
In another significant move, CST agreed to appoint an independent committee to undertake a comprehensive exploration of “strategic alternatives” that will include a review of several initiatives the company has unveiled in recent months.
This review will also involve the potential sale of the company to a third party. Considering the sale of CST’s assets would cost a buyer billions of dollars, several analysts and industry experts suggest the pool of bidders would be limited.
Representing traditional industry candidates are familiar names: Alimentation Couche-Tard, 7-Eleven and Speedway. There are others, most notably Energy Transfer Partners (ETP), which in recent years has aggressively jumped into the c-store arena with its purchase of Sunoco’s downstream assets and the Susser Holdings/Stripes operation that was once based in Corpus Christi, Texas. But ETP’s valuation is dramatically down from a year ago and most likely lacks the funds necessary to make a play of this scale.
But is it a given that CST Brands will ultimately be sold? Could it stun pundits and pursue an independent growth strategy akin to Casey’s General Stores in Ankeny, Iowa? And if CST is put on the block, how much is it likely to fetch?
The following assessments are based on interviews with CST shareholders and industry experts, most of whom spoke on condition of anonymity in order to speak candidly.
Going the Casey’s Way
Nearly six years ago, on April 9, 2010, Canadian retail juggernaut Alimentation Couche-Tard caused quite a stir. It launched an uninvited takeover bid to acquire Casey’s General Stores, the largest convenience-store chain in the Midwest.
At the time, Casey’s was trading on NASDAQ at roughly $31.50 a share. Couche-Tard offered an all-cash deal averaging $36 per share, a 14% premium over Casey’s closing price of the day before. The offer represented an EBITDA multiple of 7.4x and a price of $1.3 million per store.
The battle between Couche-Tard and Casey’s intensified over several months. Couche-Tard upped its bid and submitted a slate of nominees to sit on Casey’s board of directors. Casey’s, a community-centric operator with a strong local appeal, fought back. Ultimately, Casey’s won a resounding victory at its annual shareholders meeting and today is enjoying tremendous success—as is Couche-Tard.
Over the past 18 months, CST has made several splashy retail acquisitions and purchased the general-partner interests of a master limited partnership and wholesale fuel distributor.
More recently, it has embarked on building larger-format stores, unveiled a new marketing and branding strategy, and launched strategic initiatives in hopes of sparking what remains a ho-hum stock that bespeaks a lack of shareholder confidence in the leadership and direction of the company.
On March 4, CST announced that a committee of outside independent directors will conduct a strategic review and that the company has retained investment bankers BofA Merrill Lynch and J.P. Morgan Chase as advisers.
“We believe there continues to be a disconnect between CST's intrinsic value and the price of our common stock in the public equity markets,” CST Brand’s CEO and president Kim Lubel said in a statement. “For this reason, our board of directors is initiating a process to explore and evaluate a wide range of strategic alternatives to maximize value for our stockholders."
So could CST be the next Casey’s? Can it make it on its own?
“I would be shocked,” one shareholder said emphatically, certain CST will be acquired within months by a larger player. “My guess is they’re shopping the company as we speak.”
Said another investor, “I would put the likelihood of a sale at a 90% probability.”
A third investor entertained the thought of the independent committee emerging with multiple directions. “Could it be a Casey’s?” he rhetorically asked. “If you’re on the board of directors, you have to assess the potential value you could have, weighing against the execution risks to get there.
“Casey’s, you need to remember, had already been doing well. And the environment was very different then, with a depressed stock value.”
Indeed, when one thinks of the 7.4x EBITDA Couche-Tard originally offered, such a bid would be immediately dismissed today as laughable.
Continued: So How Much?
So How Much?
Much has been stated and speculated concerning how much CST Brands paid for Nice N Easy Grocery Shoppes and Flash Foods, two recent acquisitions. In the latter case, it appears that CST paid at least 11x EBITDA and as high as 14x, according to some shareholders interviewed.
And when Marathon Petroleum (MPC) and its retail subsidiary, Speedway, purchased Hess’ retail network in 2014, it paid a price of more than $2 million per site, or 12x to 14x EBITDA, sources said.
With that as a backdrop, it may not be surprising that shareholders interviewed by CSP Daily News unanimously expect CST Brands to fetch a double-digit EBITDA, with one shareholder suggesting as high as 16x.
“If you forced me to give my best guess I’d say between 12x and 14x," he said. "But under the right circumstances, I think it could be even higher.”
If CST can draw those kind of multiples, it would mean a substantial premium from its share average, boosting it from roughly $36 per share to more than $50.
In comparison, the news March 4 of a board shakeup and strategic reassessment prompted Wells Fargo analyst Bonnie Herzog to upgrade CST’s stand-alone value.
“Regardless of the outcome of its strategic review, we are encouraged by the diligence with which management has tried to create shareholder value and believe there is significant upside to CST’s stock price,” she wrote. “We therefore reiterate our outperform rating and $41 to $43 valuation range.”
What Happens Now?
CST’s independent committee will review the company’s operational expenditure cost structure and how it’s leveraging its fuel buying and selling, said Ken Shriber, managing director of Petroleum Equity Group Ltd, Chappaqua, N.Y.
“The committee will benchmark the expenses leading to some efficiency and cost-cutting recommendations, and complete a comprehensive fuel logistics and economics study leading to fuel-margin improvements, I expect,” he said. “Simultaneously, they will study food options at the Corner Store facilities, seeking gross-profit-dollar improvements, as well as other fast-food options, looking for a strategy to deliver best-in-class food programs like Casey’s.”
According to Shriber, it’s premature to speculate whether CST will ultimately opt to solicit an acquirer. Due diligence demands it consider multiple pathways.
“Should the committee not identify a reasonably achievable action plan that produces significant upside,” he said, “I anticipate that they would seek buyers for whom such an acquisition with CST's footprint would be strategic, such as Marathon/Speedway, Sunoco/ETP, or Gulf/Mercantor.”
Another source is more definitive about CST’s intentions.
“They’ve hired two world-class investment bankers for a reason, and that is to sell the company,” the source said, speaking on condition of anonymity. “They have put themselves on the market, and they are searching for the best offers they can get.”
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